Legal structures for social ventures: Social enterprise, social business and cooperatives in Canada

You have an idea for a business activity that will generate a blend of social and/or environmental benefits and revenues for your organization.

Under current legislation in Ontario, there is no legal structure that combines some of the benefits of both the for-profit and not-for-profit worlds.

Legal structures in Canada, the U.K. and the U.S.: “B” Corporations and Community Interest Companies

A number of hybrid structures have emerged in the U.K. and the U.S.: the “Community Interest Company” (“CIC”) in the U.K.; and the low-profit, limited liability corporation (“L3C”) and the “Benefit Corporation” (“B Corporation” or “B Corp”) in the U.S., the latter of which has expanded to Canada.

Experts believe that these legal structures provide better opportunities for social ventures to attract investment and scale their operations. Research conducted by groups such as Ogilvy Renault LLP and SiG@MaRS have led to the the adaptation of the B Corp structure to the Canadian Social Business landscape. Their recommendations to the Ontario Ministry of Research and Innovation can be read here.

Incorporating your social venture within Canada

Your social venture must carefully consider the current legal environment and existing legal structures and requirements associated with for-profit, not-for-profit, registered charities and co-operative corporations before you incorporate in Canada.

You will need to hire qualified legal counsel to assist with the process, and should choose a firm that is knowledgeable and experienced with either social enterprises and/or social-purpose businesses, depending on your situation.

Your organization you should ask the following key questions: What is the underlying nature and intent of the profit-making activities of your operation? What will your operation’s profit be used for?

Social business

If you expect that there will be a broad range of profit-making activities to generate levels of profit that are similar to traditional businesses or slightly less (due to your social or environmental commitments), then you will likely choose a for-profit organization structure and become a social-purpose business.

Social enterprise

If, in the course of achieving a social mission, your organization generates profits through profit-making activities which meet the definition of “related business” (as determined by the CRA), you will likely choose to be a social enterprise in a registered charity legal structure.

“Related businesses” are defined as activities related to or ancillary to the charitable objects but can also be unrelated activities as long as substantially all (more than 90%) of the persons employed in the profitable activity are volunteers and not remunerated. For example, a storefront operated by a charity and staffed by its volunteers, selling donated goods may be considered a related business.

Social enterprises outside “related business” in a charity

If your organization is an innovative social enterprise that wants to scale beyond the limits set by “related business,” grants and donations, you will likely rule out a registered charity structure and consider the not-for-profit organizational structure (“NFP”).

NFPs can engage in profit-making activities provided that the activities are compatible with the not-for-profit objects of the NFP and the profits are used exclusively for promoting its stated goals. Indicators that an NFP may be operating an impermissible profit-making business include the following:

operation in a normal commercial manner

goods and services are not restricted to members and their guests

operation on a profit basis rather than a cost-recovery basis

the business is operated in competition with taxable entities carrying on the same business.

Cooperatives

If you are an organization that will provide a centralized set of services to a group of members who will have an equal vote on how the organization will be operated, and the business activities of the organization will be operated as nearly as possible on a cost recovery basis, you will likely choose a Co-operative Corporation structure.

What legal structure should you choose?

Today, there is no right or wrong answer to whether you should establish your social venture as a not-for-profit social enterprise (stand-alone or part of a registered charity), a for-profit social-purpose business, or a co-operative.

In the current legal environment, social entrepreneurs need to work with legal counsel, their boards and advisors to determine which legal structure works best for their situation. Where possible, you can then add ancillary agreements and processes to make the structure work better for your organization and your stakeholders.

Interested in learning more about social innovation and social entrepreneurship? Visit theSiG Knowledge Hub.

Carter, T.S., and Man, T.L.M. (2008, October 24). Canadian Registered Charities: Business Activities and Social Enterprise—Thinking Outside the Box. Presented at National Centre on Philanthropy and the Law Annual Conference: Structures at the Seam: The Architecture of Charities’ Commercial Activities.http://www.carters.ca/pub/article/charity/2009/tsctlm0507.pdf